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Financial Aid
Don’t let the costs of college take you by surprise — the Section 529 plan is available to help you. Here are three tips
for making the most of it.
By Phil Dyer, CFP
Section 529 plans are rapidly becoming a popular way for many
parents and grandparents to help fund increasing college expenses.
However, some recent problems — an embezzlement scandal with one
top-rated plan, the high fee structure of some plans, and some
brokers recommending plans that pay them commissions instead of
plans giving investors a state income tax break — have increased
scrutiny on 529 plans by the SEC and other regulatory groups.
Managed at the state level, 529 plans are structured much like Roth
IRAs, in that contributions are made with post-tax dollars, earnings
grow tax-deferred, and — provided the proceeds are used for
“qualified education expenses” — distributions are free from federal
and most state income taxes. Qualified education expenses cover
tuition, room and board, books and other supplies, uniforms, and
transportation.
Given the benefits and potential pitfalls, consider these three
issues before investing:
- Does the plan offer a state income tax deduction?
Some states do, which can provide a nice state tax break.
However, just because you get a state income tax break, don’t
assume your state’s plan makes the most sense. High fees or poor
investment results can wipe out any tax benefit.
- What are the fees and expenses? These can reduce your
investment returns significantly, so pay close attention to
them. A 1 percent difference in fees may not seem like much, but
suppose Plan A has fees and expenses totaling 2 percent
annually, and Plan B charges 1 percent. With an initial $10,000
contribution and both plans averaging 10 percent annually for 18
years, Plan B will accumulate about $7,200 more than Plan A
($47,171 versus $39,960).
- Is the plan direct or broker-sold? Many states offer
several 529 plan options, including some purchased directly from
the state and some sold through brokers. Using a broker-sold
plan can add up to 2 percent to your annual expenses, so weigh
any advice against the higher fees carefully.
Anyone can contribute up to the gift tax exclusion amount
(currently $12,000 per donor, per donee annually), and most 529
plans allow total lifetime contributions of $250,000 or more per
beneficiary. Also, a special rule allows up to 5 years of
contributions ($60,000) to be made per donor in one calendar year.
Therefore, a married couple could give $120,000 to a single
beneficiary in one year. Currently, the law providing for income tax
free 529 plan withdrawals expires in 2010. Congress is expected to
renew or extend the provision, but there is no guarantee.
Be sure to consider the advantages and disadvantages of 529 plans
before committing to one.
Don’t Forget to Do Your Homework
■ Find out how well a 529 plan could work for you. Visit MOAA’s
Web Base,
www.moaa.org/college_funding, and click on the 529 College
Savings Calculator. Start planning today.
— Former Army Capt. Phil Dyer, CFP, is
deputy director for financial education, Benefits Information. For
financial advice, members can contact Garrett Planning Network at
(866) MOAA-GPN (662-2476) or
www.garrettplanning.com,
or visit
www.moaa.org/financialcenter for other resources.
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